Liars Poker, by Michael Lewis, 1990
I’ve spent some time cleaning up the elephant dung from a bond trading floor, so this book strikes home. Lewis makes raw fun of the incompetence and ‘big swinging dicks’ of Salomon Brothers in the 80s, where he trained in New York and worked in London as a bond salesman. It’s just not clear which meaning of the word ‘dick’ we’re talking about. The phrase was used in the film “Wall Street,” a sequel about the recent market crash which is soon to premiere. This book also served as background for Tom Wolfe’s “Bonfire of the Vanities.” Liar’s Poker stands out because most insider books about the ‘market’ are nothing but apologies. This one isn’t. Lewis is coming out with a new book, “The Big Short,” about the short sellers who anticipated the housing bubble and the Collateralized Mortgage Obligation (CMO) crash.
CMO’s – which recently brought down Wall Street - were actually invented in the early 1980s at Salomon Brothers, when Lewis Ranieri developed a way to take a group of mortgages and turn them into a stable bond. A little later, Drexel Burnham’s Michael Milken developed the “junk” bond – the debt of supposedly weak corporations. Milken guessed correctly that a firm that was big enough would not be allowed to go bankrupt, and so the bonds would be paid off. Milken later used junk bonds for hostile takeovers, because ownership of enough debt ensures you have control of a corporation. This is, of course, similar to stock ownership, but right out of left field.
Both these products bloomed during the Reagan era, and through several Reagan recessions, resulting in massive profits and growth for the financial sector, at the same time as the productive economy constricted like a puking stomach. They were examples of the ‘creative’ products American financialization wrought. What is clear throughout the book is the central role played by Fed monetary policies and federal tax and administrative laws in their development. Apologists for the market claim it is the geniuses from the Ivy League who make the money. However, it is changes in government conditions that allow, no, force Wall Street to make it. The era ended with the 1987 market crash – when the only people who made money were the people who shorted equities or who traded bonds.
Lewis was a Princeton and London School of Economics grad who knew next to nothing about being an investment banker, in spite of all his education. What is extraordinary about this is that during this period many, many Harvard, Yale and other Ivy League graduates all wanted to be investment bankers too. The bourgeoisie’s ‘best and brightest’ were attracted to making massive amounts of money quickly. Which shows you the real quality of these people. Lewis himself was not a blue-blood, however, which gave him a bit of perspective. He never confuses gambling with ‘investing.’ He clearly saw how many traders (some babies with only a few months experience) intentionally ripped off customers in the interests of the firm or themselves, knew next to nothing about the products they sold, used (illegal) inside information, and were, as Frank Zappa would say, “only in it for the money.”
Essentially, Salomon sold mortgage bonds to S&Ls, which, after a change in federal law, allowed that once staid industry to turn into extreme gamblers. Because of the massive amount of mortgages in the US, the market seemed endless. Lewis, however, spends little time on the parallel collapse of the S&L industry during this period – hastened by its gambling on CMOs.
This is a hilarious book. Lewis shows how the mortgage-trading department at Salomon was run by fat Italians who never stopped eating, swearing, playing practical jokes and making money. In the good days in the early 80s they were more like a fraternity than a business unit. Ranieri himself came from the back-office at the firm, and then became the head of mortgage trading. He always wore ugly, cheap suits to remind himself and others where he came from. The firm was run mostly by Jewish businessmen – John Gutfruend being the notorious CEO. Unlike other Wall Street‘white shoe’ firms like Morgan Stanley, full of WASPs, Salomon's ethnics specialized, not in equities, but in debt – government, municipal and mortgage. As the slogan kind of went, “Debt is Good.” They had a monopoly on mortgage debt for about 4 years. Salomon eventually weakened itself by not paying its traders a real percentage of what they made (Lewis got $90,000 and still thought he was screwed…), then refusing to get involved in junk bonds – and the traders deserted to every other firm on the Street, creating competition for Salomon.
Lewis quit in 1988, even though he knew he could have made millions if he’d stayed at Salomon. The whole time he was there, he kept notes on events, which formed the basis for this book. Lewis is not an opponent of capital, but he's an honest observer nevertheless.
And I did not buy it at MayDay Books.
Red Frog - 3/30/32010